Breakout or No Breakout, Short-term Correction Appears Likely

In general, gold market overview appears mixed according to PM Investors and
it is obvious. Some say gold has miles to travel, others suggest gold may take
a pause before next journey and some others say it's time for gold to fall.
Debates continue in blogosphere. Recently, one of our Subscribers has sent
us a link to an online article about
gold being ready to drop to $1,320. This article claims there will be a decline
in the price of precious metals in the second half of 2011 and that the proliferation
of gold ETFs will make the drop especially violent.

The author argues that the recovery will be a long, hard slog over the
coming years, rather than runaway growth and inflation or catastrophic collapse.
With neither the bulls' nor bears' extreme scenarios proving accurate, the
logic behind owning gold seems suspect. The author concludes that barring
a sudden dramatic shift in economic circumstances, such as a strong oil spike
or major sovereign default, we favor a drop in gold prices over the coming
six months. In looking at the prevalence of investors and the ease of use
of gold ETF's, we also expect that any significant sell-off will be particularly
strong and violent. We expect to see spot gold trading below $1320 by the
end of the year.

Summing up, the author's three major bearish factors for gold are that the
recovery will be a long hard slog, rising interest rates and the rallying
of the USD index.

We would like to share our thoughts on this topic to our readers.

We disagree that the economic situation has become stable and that there will
be no extremes. We had pointed out just a few of the reasons why this is not
the case in our latest gold & silver
miners commentary. As to interest rates, during the previous precious metals
bull market, the interest rates actually followed gold higher for considerable
time before the top was reached. In a way, the fact that the rates are not
rising suggests that this bull market is far from being over. As to the third
argument about the USD index rallying, there have been plenty of times since
2006 when gold moved higher along with the USD Index as it was euro-weakness
driven. Consequently, a rising USD does not necessarily have to be a bearish
factor for precious metals at all times.

Therefore, we don't think that gold's fundamental situation has really deteriorated
and we expect the bull market to continue.

However, in the short run, the situation might (!) be quite different. In
fact, trade signals may vary according to the short-term strategies. For example,
our SP Gold Bottom Indicator, flashed a buy signal on June 29th while at the
same time we were short-term bearish on the market (it turned out that we should
have followed it).

Keeping this in mind, let's have a look at current gold market moves (charts
courtesy by http://stockcharts.com).

In very long-term chart for gold, we see a third attempt to move above the
long-term rising trend channel. In late 2010, a similar attempt was unsuccessful
and was followed by a significant decline. Certainly this could be the case
this time as well. Naturally, we could see a true breakout, however so far
it has not been confirmed yet, so we remain skeptical.

The current momentum, which gold has shown at the first sight seems to make
the breakout theory quite probable (rallying on strong volume is bullish phenomenon),
however, even gold is to rally strongly from here, a correction will likely
be seen before additional significant upward movement starts. Please note that
there is a strong resistance level created by extrapolating previous tops and
bottoms and using the Phi #1.618. This is just above $1,600.

If gold can move above this level and confirm its move, the next target would
be well above current prices. This would be quite a rally from here, but such
a move does not seem very likely over the next few months - at least not yet.

In the long-term GLD ETF chart, we see a very sharp rally in the share price
and this caused a similar rally in the RSI. In fact, RSI levels rose in a way
which was truly unprecedented as they went directly from buy levels to sell
levels. It seems never to have happened this quickly before - at least not
in the past few years. Early this year and also in the middle of last year,
we saw quick moves up in RSI levels but both times were a slower than this
one.

Two similar sets of situations with two similar patterns each are present
today. This is somewhat perplexing. Two of the similar patterns point to a
decline in price to the level of the 150-day moving average. On the other hand,
two additional patterns point to a small correction to be followed by a continuation
of the rally. The picture should become clearer in the days ahead and other
signals may also give us better insight.

Summing up, it seems most likely that a small consolidation will be
seen and the way it plays out will determine where gold prices go in the weeks
ahead. The long-term picture is clearly bullish, but it doesn't mean that gold
can't decline for a month or so.

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Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who
takes advantage of the emotionality on the markets, and invites you to do
the same.

His company, Sunshine Profits, publishes analytical software that anyone can
use in order to get an accurate and unbiased view on the current situation.

Recognizing that predicting market behavior with 100% accuracy is a problem
that may never be solved, PR has changed the world of trading and investing
by enabling individuals to get easy access to the level of analysis that
was once available only to institutions.

High quality and profitability of analytical tools available at www.SunshineProfits.com are
results of time, thorough research and testing on PR's own capital.

PR believes that the greatest potential is currently in the precious metals
sector. For that reason it is his main point of interest to help you make
the most of that potential.

As a CFA charterholder, Przemyslaw Radomski shares the highest standards for
professional excellence and ethics for the ultimate benefit of society.

Disclaimer: All essays, research and information found above represent
analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates
only. As such, it may prove wrong and be a subject to change without notice.
Opinions and analyses were based on data available to authors of respective
essays at the time of writing. Although the information provided above is
based on careful research and sources that are believed to be accurate, Przemyslaw
Radomski, CFA and his associates do not guarantee the accuracy or thoroughness
of the data or information reported. The opinions published above are neither
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